Flug: Good public services mean high taxes

Bank of Israel Governor Karnit Flug: If you want a big government, it means large expenditures and high taxes.

"There is room to increase competition in the banking system, especially in the retail, household, and small business sectors," Governor of the Bank of Israel Karnit Flug told the Caesarea Forum by video conference today.

Flug stressed that competitiveness "will not come at the expense of the banks' stability, but as a parallel process of streamlining by the banks," adding unequivocally, "This streamlining is necessary." She said that experience shows that the price people pay as the result of a crisis that includes a banking crisis is several times higher than the price paid in a crisis without a financial crisis.

Commenting on the desirable size of a government, i.e. the size of the government as a percentage of GDP, not the number of ministers, Flug seems to disagree with Prime Minister Benjamin Netanyahu's remarks earlier in the day. "The size of government reflects social preference. It could be that a small government which levies low taxes or a larger government with higher taxes - both cases could be economically successful. The important thing is for these things to be linked; if you want a big government, it means large expenditures and high taxes.

"We cannot allow ourselves a large deficit, because we must lower the debt burden. This is critical from a macroeconomic perspective." Flug added, "So long as the defense burden is heavy and defense spending is heavy, if we want quality government services as in the other developed countries, it means a bigger government (larger government spending) compared with other developed countries, which means a higher tax burden."

Flug said that Israel must keep a low interest rate so long as developed countries, including the US, keep expansionist monetary policies. "This is possible because of the low inflation and is necessary because of the slow growth. It encourages the taking of mortgages, which is why we see investors who have no alternatives to the housing market. The US is showing clear signs of recovery, but the Fed wants to see more signs before it begins tapering."